Mining’s Austerity Era is Bad News For The Tax Collector

Engineers walk near a mining truck at the open pit gold mine of Goldcorp in Penasquito, Mexico

For much of the last decade the mining industry has been in a global boom, snapping up concessions and expanding capacity to meet rising demand. The boom is now coming to an end, and governments that grew accustomed to healthy tax and fee revenue from miners are feeling the pinch.

Miners are cutting costs and exiting their less profitable projects, and no longer seem as willing to pay up the kind of money to local governments that they once did. Governments, in return, are trying not to back down and sacrifice their own revenues for the sake of mining industry profits. The ultimate bluff to call, from the industry perspective, is to walk away from a project and the thousands of local jobs they typically generate. And that bluff is getting called more often now that the industry is slowing down.

This has happened most prominently in Australia, where BHP Billiton said last year it would postpone or scale back more than $50 billion worth of planned projects as part of a cost-cutting exercise. The move came after a lengthy skirmish between the Australian government and the mining industry over new taxes on mining profits and carbon emissions that came into effect the previous month.

Another walk-away move came this week, when Brazil’s Vale decided to abandon work on its huge Rio Colorado potash mine in Argentina, one of the country’s largest foreign investment projects. Vale has already invested at least $3.7 billion in the project, but with the economics of potash production going bad, it asked the Argentinian government to make the deal a little sweeter.

How much sweeter? Here’s how the WSJ’s Paul Kiernan and Shane Romig covered comments on the matter by Argentinian Planning Minister Julio de Vido this week (emphasis ours):

Though the company never publicly revised its $5.92 billion investment forecast for the project, Argentina’s government said Tuesday in a statement that Vale had most recently estimated Rio Colorado’s cost at $10.9 billion. High inflation, a depreciating Argentine peso and issues with local authorities drove up the projected costs of the project.

In order to move forward with Rio Colorado, Vale requested tax incentives worth some $3 billion, the Argentine government said in the statement.

“There’s no way we’re going to pay this,” Mr. De Vido said Wednesday, adding that the company “clearly hasn’t complied” with all the conditions of the concession contract.

Vale had previously said it would stop the work while trying to find a way to make it more profitable, but Mr De Vido said if the company does not continue as agreed — and without a $3 billion handout — its rights to mine the land would be revoked.

And while that may have once been the kind of fighting words that brought miners back to the negotiating table, in today’s environment the government may end up with nobody returning its calls. From the WSJ’s Paul Kiernan today:

The fact that Argentina was “unwilling to show any flexibility” toward its largest trading partner, Brazil, regarding its largest foreign direct investment project–Vale’s $6B Rio Colorado potash mine–is a bad sign. Vale suspended the project this week after failing to reach an agreement with Argentina’s government to help it rein in soaring costs. “The most likely outcome is that the government rescinds Vale’s concession and seeks new avenues to develop the project,” Eurasia Group says. “But it’s unlikely that any investor would take on the project under the current circumstances.” Since Argentina’s national and regional governments have neither the resources nor capabilities to develop Rio Colorado, it will likely be abandoned, Eurasia Group adds.

Comments (1 of 1)

"The move came after a lengthy skirmish between the Australian government and the mining industry over new taxes on mining profits and carbon emissions that came into effect the previous month." Kloppers at the time when directly questioned regarding whether this was the determining factor for preceding or not replied no.